3048 Exam One.docx

Lecture One
Scarcity: (Fundamental Premise) Society’s wants exceed the resources available to
satisfy them. This implies choice, both individual and social.
The three questions that must be answered in any economy: What how and for whom?
These questions lead to one big one: What is the best way to organize the activities of
individuals? Let people do what they want, plan and regulate, or a mix
Concept 1: A choice is a tradeoff, in order to get something we must give up something
else
Concept 2: Opportunity cost, the highest valued alternative we give up is the
opportunity cost of the activity chosen
Concept 3: The benefit­cost principal, if the benefit of an activity exceeds the
opportunity cost, do it! Otherwise, don’t.
­We make choices in small steps (at the margin) and those choices are influenced by
incentives.
When marginal benefit equals marginal cost, net benefit it maximized
Marginal: One more unit
Incentives: Inducements to take particular actions, different incentives change marginal
benefits and costs
Incentives and interpersonal behavior need to support cooperation, beneficial exchange,
and general distribution of benefits
Lecture Two: Self interest as the basis of economic interaction
Ethics: Branch of philosophy dealing with values relating to human conduct, with
respect to the rightness and wrongness of certain actions and to the goodness and badness
of the motives and ends of such actions
Selfishness: Denotes an excessive or exclusive concern with oneself; and as such it
exceeds mere self interest or self concern. In that it necessarily connotes a disregard for
others, it is beyond the act of placing one’s own needs or desires above the needs or
desires of others (self interest)
Self­Interest: 1. One’s personal profit, benefit, or advantage 2. Regard to one’s own
advantage or welfare especially to the inclusion of others
Altruism: Concern for the welfare of others, regard for others as a principle of action;
opposed to egoism or selfishness
Two types of Egoism: Psychological and ethical Psychological: Asserts that we do act selfishly. Our motivations are selfish
Ethical: Maintains that we should act selfishly
Sophistry: An argument that seems plausible, but is misleading, especially one devised
deliberately to be so; the art of using deceptive speech or writing
Sophists­ denoted a class of individuals who taught courses in excellence, these were
often taught for a price. The main idea is that men make their own rules, typically based
on self interest and there are no moral absolutes
What would rational beings do? Institute a regime that limits their predations on each
other.
Moral sentiments: However selfish a man may be, there are always some principles in his
nature which interest him in the fortune of others
Complex sequential production processes:
Rivalry: Consumption by one person reduces the amount available to others y by the
amount consumed
Excludable: Non­payers can be prevented from consuming the good
Nonrivalry: Consumption by one person does not reduce the amount available to others
(Marginal cost of an additional consumer is zero)
Nonexcludable: Impossible to prevent someone from consuming the good
The social marginal benefit is the vertical summation of all individual’s MB curves Lecture Three: Public goods and games in economic ethics
Two types of goods: Public and private
Public features: Nonrivalry and Nonexcludable
A free rider is a person who consumes a good without paying for it. Private provision (no
one has the incentive to pay so they let others do it)
Game Theory: A game is a situation of strategic interdependence played according to a
set of rules. In addition to rules games have players, strategies, and payoffs
Prisoners Dilemma: Two partners in crime have been caught but the prosecutor only has
enough evidence to convict them for a lesser offense than the one actually committed.
Being kept separate, each player can turn State’s evidence “confess” or “remain silent”
payoffs depend on the combo of strategies chosen
Nash Equilibrium: Each player’s strategy is the best against the other player’s strategy
Dominant Strategy Equilibrium: For each player there is a single best strategy,
regardless of what the other player does. Not all nash equilibria are dominant strategy
Lecture Four: Games and how people act
Subgame perfect equilibrium:
For Axelrods tournament: In one shot game there is a dominant strategy­ to defect
Tit for tat: Pay other player back in kind, start with cooperate then do what other player
did in previous round
Mutual Reciprocity: Motivated by selfishness but cooperation in one­shot games
Lecture Five: Supporting Better Equilibria
Normative ethics: Relatively general nature of “what is good” Applied ethics is the
application to narrower domains and practical issues (bus